[Federal Register Volume 87, Number 214 (Monday, November 7, 2022)]
[Rules and Regulations]
[Pages 66940-66942]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-23933]


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BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Chapter X


Bulletin 2022-06: Unfair Returned Deposited Item Fee Assessment 
Practices

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Compliance bulletin.

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SUMMARY: A Returned Deposited Item is a check that a consumer deposits 
into their checking account that is returned to the consumer because 
the check could not be processed against the check originator's 
account. Blanket policies of charging Returned Deposited Item fees to 
consumers for all returned transactions irrespective of the 
circumstances or patterns of behavior on the account are likely unfair 
under the Consumer Financial Protection Act (CFPA). The Consumer 
Financial Protection Bureau (Bureau or CFPB) is issuing this bulletin 
to notify regulated entities how the Bureau intends to exercise its 
enforcement and supervisory authorities on this issue.

DATES: This bulletin is applicable as of November 7, 2022.

FOR FURTHER INFORMATION CONTACT: Sonya Pass, Senior Legal Counsel, 
Legal Division, at 202-435-7700. If you require this document in an 
alternative electronic format, please contact 
[email protected].

SUPPLEMENTARY INFORMATION:

I. Background

    A Returned Deposited Item is a check that a consumer deposits into 
their checking account that is returned to the consumer because the 
check could not be processed against the check originator's account. 
There are many reasons deposited items can be returned unprocessed. For 
example, the check originator may not have sufficient funds available 
in their account to pay the amount stated on the check; the check 
originator may have directed the issuing depository institution to stop 
payment; the account referenced on the check may be closed or located 
in a foreign country; or there may be questionable, erroneous, or 
missing information on the check, including with respect to the 
signature, date, account number, or payee name.
    Consumers often rely on payments made by check for personal, 
family, or household purposes. The check may be from another consumer 
or from a business or entity and may represent a gift, a refund, a 
payment, or a public benefit. In many circumstances, as discussed 
below, the check depositor has no control over whether, and likely no 
reason to anticipate that, the deposited check would be returned. Nor 
as a general matter can the check depositor verify with the check 
originator's depository institution prior to depositing a check whether 
there are sufficient funds in the issuer's account for the check to 
clear. Yet, many depository institutions have blanket policies of 
charging fees to the check depositor for Returned Deposited Items for 
every Returned Deposited Item, irrespective of the circumstances of the 
particular transaction or patterns of behavior on the account. While 
certain entities, such as lenders and landlords, may be able to recoup 
such fees from the check originator, consumers generally cannot.
    Under the blanket policies of depository institutions, Returned 
Deposited Item fees are often in the range of $10-$19. The fees are 
typically charged in a flat amount on a per-transaction basis. Notably, 
in the case of checks that are returned for insufficient funds, 
Returned Deposited Item fees are charged in addition to any non-
sufficient funds fees charged by the originating bank to the check 
originator. Assuming a typical Returned Deposited Item fee of $12 and a 
non-sufficient funds fee of $35, when the depositor's bank charges a 
Returned Deposited Item fee to the depositor consumer, and the check 
originator's bank charges a non-sufficient funds fee to the check 
originator for the same check, those banks collectively generate $47 in 
fees from each returned check--$12 to the depositor's bank, $35 to the 
originator's bank.

II. Violations of the Consumer Financial Protection Act \1\
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    \1\ As a matter of prosecutorial discretion, the CFPB does not 
intend to seek monetary relief for potential unfair practices 
regarding Returned Deposited Item fees assessed prior to November 1, 
2023.
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    The Consumer Financial Protection Act (CFPA) prohibits covered 
persons from engaging in unfair acts or practices.\2\ Congress defined 
an unfair act or practice as one that (A) ``causes or is likely to 
cause substantial injury to consumers which is not reasonably 
avoidable,'' and (B) ``such substantial injury is not outweighed by 
countervailing benefits to consumers or to competition.'' \3\
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    \2\ 12 U.S.C. 5536(a)(1)(B).
    \3\ 12 U.S.C. 5531(c)(1).
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    Blanket policies of charging Returned Deposited Item fees to 
consumers for all returned transactions irrespective of the 
circumstances of the transaction or patterns of behavior on the account 
are likely unfair.
    Fees charged for Returned Deposited Items cause substantial injury 
to consumers. Under the blanket policies of many depository 
institutions, Returned Deposited Item fees cause monetary injury, in 
the range of $10-19 for each returned item. Depository institutions 
that charge Returned Deposited Item fees for returned checks impose 
concrete monetary harm on a large number of customers.
    In many of the instances in which Returned Deposited Item fees are 
charged, consumers would not be able to reasonably avoid the 
substantial monetary injury imposed by the fees. An injury is not 
reasonably avoidable unless consumers are fully informed of the risk 
and have practical means to avoid it.\4\ Under blanket policies of many 
depository institutions, Returned Deposited Item fees are charged 
whenever a check is returned because the check originator has 
insufficient available funds in their account, the check originator 
instructs the originating depository institution to stop payment, or 
the check is written against a closed account. But a consumer 
depositing a check would normally be unaware of and have little to no 
control over whether a check originator has

[[Page 66941]]

funds in their account, will issue a stop payment instruction, or has 
closed the account. Nor would a consumer normally be able to verify 
whether a check will clear with the check originator's depository 
institution before depositing the check or be able to pass along the 
cost of the fee to the check originator.
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    \4\ See F.T.C. v. Neovi, Inc., 604 F.3d 1150, 1158 (9th Cir. 
2010).
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    Liability under the prohibition on unfair acts or practices depends 
on the particular facts and circumstances. The CFPB notes that it is 
unlikely that an institution will violate the prohibition if the method 
in which fees are imposed are tailored to only charge consumers who 
could reasonably avoid the injury. For example, if a depository 
institution only charges consumers a fee if they repeatedly deposit bad 
checks from the same originator, or only charges consumers a fee when 
checks are unsigned, those fees would likely be reasonably avoidable.
    Regulation DD, which applies in relevant part to depository 
institutions except for credit unions,\5\ requires depository 
institutions to disclose fee information on depository accounts to 
consumers before an account is opened or a service is provided.\6\ The 
returned item fee is among the fees required to be disclosed in the fee 
schedule when the consumer first opens the account.\7\ In applying the 
CFPA's unfairness prohibition, the Bureau finds persuasive the 
reasoning of the D.C. Circuit and the Federal Trade Commission (FTC) in 
American Financial Services Ass'n v. F.T.C. (AFSA).\8\ The FTC issued 
the Credit Practices Rule, which determined that creditor remedies of 
certain irrevocable wage assignments and non-purchase, non-possessory 
security interests in household goods are unfair acts or practices. 
Although the creditor remedies were disclosed and agreed upon in credit 
contracts, the FTC determined, and the D.C. Circuit upheld, that the 
provisions were not reasonably avoidable because ``(1) consumers are 
not, as a practical matter, able to shop and bargain over alternative 
remedial provisions; and (2) default is ordinarily the product of 
forces beyond a debtor's control.'' \9\ Similar unfairness principles 
likely apply to account opening disclosures of blanket policies of 
imposing fees for Returned Deposited Items because, similarly, 
consumers have limited ability to bargain over specific fee terms in 
selecting deposit accounts, and consumers are charged these fees in 
circumstances beyond their control.
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    \5\ The National Credit Union Administration has rules governing 
disclosures for credit unions at 12 CFR 707 et seq.
    \6\ 12 CFR 1030.4.
    \7\ See comment 4(b)(4)-1.iv (listing ``fees associated with 
checks returned unpaid'' as a type of fee that must be disclosed); 
Reg DD Sample Form B-4 (describing a fee of $5 for ``Deposited 
checks returned'').
    \8\ 767 F.2d 957, 972 (D.C. Cir. 1985).
    \9\ Id. at 976.
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    The CFPB advises institutions that it may be difficult to show that 
the injury from blanket policies of charging Returned Deposited Item 
fees is outweighed by countervailing benefits to consumers or 
competition. Check processing is a service made broadly available to 
all depositors of checks, and there is no separate benefit to consumers 
from having a deposited check returned, as opposed to paid. Benefits to 
the depository institutions themselves are not necessarily benefits to 
consumers or competition. Even if they were, the costs to the 
depository institution of developing and maintaining a reliable check 
processing system for account holders likely is not attributable to 
Returned Deposited Item transactions, as those costs are necessary to 
provide payment services to all check users. Returned Deposited Item 
fees are also not well-tailored to recoup costs from the consumers 
actually responsible for the costs to depository institutions of 
expected losses for the limited circumstances in which the institution 
cannot recoup funds made available to the depositor on a check that is 
later returned. Instead, the fee is charged to depositors even where 
the depository institution incurs no such loss from the returned 
transaction, and institutions usually do not collect the fee in those 
limited circumstances where they actually incur a loss (entities only 
incur a loss because they cannot collect). Depository institutions may 
argue that consumers may also receive a benefit from a fee to the 
extent that the fee leads to a decrease in front-end or other costs to 
the consumer for the product or an increase in the availability or 
quality of services. However, to the extent the revenue generated by 
Returned Deposited Item fees charged pursuant to blanket policies 
causes any discernable consumer benefits in terms of lower front-end 
costs or better quality or more available services, it is unlikely that 
a financial institution would be able to show that any such benefits 
would outweigh the substantial injury to the consumer even in terms of 
the total amount of such fees paid by the consumer. Indeed, even 
assuming a 100% pass through of the fee to lower front-end costs for 
consumers charged the fee, that pass through would not be greater than 
the total cost of the fees to those consumers.
    Deterring consumers from depositing checks in instances where the 
checks will be returned may benefit consumers and the public interest 
if the institution's policy and practice are well-tailored to address 
the issue, do not harm consumers in some other way, minimize losses to 
the depository institution that would be passed through to consumers, 
bolster the integrity of the banking system through loss avoidance, 
and, in the case of fraud, prevent conduct that offends public policy 
as embodied in statutes and common law. However, deterrence can only be 
accomplished through the collection of fees in circumstances where the 
consumer anticipates that a check will be returned but deposits it 
anyway, such as where a consumer knowingly deposits a counterfeit 
check. As noted, however, this bulletin is focused on Returned 
Deposited Item policies that indiscriminately impose fees in 
circumstances where the consumer does not know the check would be 
returned. In other words, blanket Returned Deposited Item polices are 
not targeted to address patterns of behavior indicative of fraud or 
other circumstances where the consumer reasonably should have 
anticipated that the check would be returned.\10\ With respect to 
fraud, it is also not apparent that the nature or amount of the fees 
would result in deterrence beyond other available mechanisms, such as 
reviewing depositors' accounts, criminal penalties, or more tailored 
Returned Deposited Item fee policies aimed at consumers who deposit bad 
checks intentionally or negligently.\11\
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    \10\ As noted above, policies that are tailored to only charge 
consumers who could reasonably avoid the injury likely would not 
violate the prohibition on unfairness.
    \11\ See F.T.C. v. Amazon.com, No. C14-1038-JCC, 2016 WL 
10654030, at *10-11 (W.D. Wash. July 22, 2016) (finding no 
countervailing benefits where the purported benefits could be 
achieved without engaging in the conduct that caused substantial 
injury).
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    As to benefits to competition, economic research suggests that add-
on fees may have a distortionary market effect by making it more 
difficult to compete on transparent front-end prices and reducing the 
portion of the overall cost that is subject to competitive price 
shopping.\12\ The concern is especially

[[Page 66942]]

heightened for back-end penalty fees which are often not subject to the 
competitive process: firms typically have not competed for customers 
based on penalty fee pricing and consumers do not shop on the basis of 
fees they do not intend to incur. Indeed, economic research suggests 
that consumer decision making is impaired by hidden or shrouded pricing 
regimes.\13\ Given these harms to competition, the CFPB advises 
institutions that there is a substantial risk of violating the 
prohibition on unfair acts or practices with respect to this practice.
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    \12\ See Xavier Gabaix & David Laibson, Shrouded Attributes, 
Consumer Myopia, and Information Suppression in Competitive Markets, 
Quarterly Journal of Economics, Vol. 121, Issue 2 (May 2006), 
pp.505-40, available at https://pages.stern.nyu.edu/~xgabaix/papers/
shrouded.pdf; see also Steffen Huck & Brian Wallace, The impact of 
price frames on consumer decision making: Experimental evidence 
(2015), available at https://www.ucl.ac.uk/~uctpbwa/papers/price-
framing.pdf; Sumit Agarwal, Souphala Chomsisengphet, Neale Mahoney, 
& Johannes Stroebel, Regulating Consumer Financial Products: 
Evidence from Credit Cards, Quarterly Journal of Economics, Vol. 
130, Issue 1 (Feb. 2015), pp. 111-64, at p.5 & 42-43, available at 
https://academic.oup.com/qje/article/130/1/111/2338025?login=true; 
Sumit Agarwal, Souphala Chomsisengphet, Neale Mahoney, & Johannes 
Stroebel, A Simple Framework for Establishing Consumer Benefits from 
Regulating Hidden Fees, Journal of Legal Studies, Vol. 43, Issue S2 
(June 2014), pp.S239-52, available at https://nmahoney.people.stanford.edu/sites/g/files/sbiybj23976/files/media/file/mahoney_hidden_fees_jls.pdf; Glenn Ellison, A Model of Add-On 
Pricing, Quarterly Journal of Economics, Vol. 120, Issue 2 (May 
2005), pp.585-637, available at https://economics.mit.edu/files/7605.
    \13\ See Gabaix & Laibson, supra note 12; Huck & Wallace, supra 
note 12; Agarwal et al., Regulating Consumer Financial Products, 
supra note 12; Agarwal et al., A Simple Framework, supra note 12; 
Ellison, supra note 12.
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III. Regulatory Matters

    This is a general statement of policy under the Administrative 
Procedure Act. It provides background information about applicable law 
and articulates considerations relevant to the Bureau's exercise of its 
authorities. It does not confer any rights of any kind. The Regulatory 
Flexibility Act does not require an initial or final regulatory 
flexibility analysis for general statements of policy.\14\ It also does 
not impose any new or revise any existing recordkeeping, reporting, or 
disclosure requirements on covered entities or members of the public 
that would be collections of information requiring approval by the 
Office of Management and Budget under the Paperwork Reduction Act of 
1995.\15\
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    \14\ 5 U.S.C. 603(a), 604(a).
    \15\ 44 U.S.C. 3501-3521.

Rohit Chopra,
Director, Consumer Financial Protection Bureau.
[FR Doc. 2022-23933 Filed 11-4-22; 8:45 am]
BILLING CODE 4810-AM-P